Banks wary of microfinance institutions, would rather lend to self-help groups

After burning their fingers with microfinance institutions (MFIs), banks plan to speed up lending to self-help groups (SHGs) instead.

The view changed after collections by MFIs in Andhra Pradesh deteriorated considerably and there were initial signs of the contagion spreading to other states.

An SHG is a group of around 20 people who come together voluntarily and make savings of small amounts regularly. The saved money is used to provide loans with an interest to the group members.

Once the SHG gathers some stability, it gets linked to a bank, which starts providing credit to it. This is called the SHG-bank linkage programme, after which the SHG becomes accountable for repayment of the loan to the bank.

“We are going through a time when we feel more comfortable in lending to SHGs rather than MFIs. Earlier, we used to lend to MFIs who in turn used to lend to these SHGs at very high rates of interest, which were 25-30% per annum. But as a bank, we can lend to them at rates as low as 13-14% per annum,” said T R Bajalia, executive director, IDBI Bank.

The RBI too wants banks to step up lending to SHGs, though it has also asked them to the need for maintaining funding lines to MFIs on merit, to prevent contagion.

Further, banks are more comfortable lending to SHGs as the recovery rate of loans disbursed to them is far better than those disbursed to MFIs.

“As on date, we have lent Rs2,023 crore to SHGs and exposure to MFIs is only Rs73 crore. By the end of this fiscal, lending to SHGs will touch Rs2,200 crore and lending to MFIs will touch Rs80 crore. This is because the recovery rate in SHGs is 99.5% compared with a recovery rate of around 95% in MFIs,” said T M Bhasin, chairman and MD, Indian Bank.

And it’s not just the SHGs, but also individual farmers and micro-enterprises in villages that the banks are lending directly to rather than to MFIs.

“The transaction costs of MFIs are very high... We go for lending directly by way of business correspondents and this also helps us keep the costs low,” said N Seshadri, executive director, Bank of India.